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Five-point plan for full market return

Finance Ministry prepares its next moves after the moderate success of three-year bond By Sotiris Nikas

The Finance Ministry has laid out a plan for Greece’s next moves in the international financial markets. Following the issue of three-year bonds last week and despite unrest triggered by the Portuguese banking sector, the ministry is setting in motion a series of actions for managing the Greek debt and gradually strengthening Greek securities in the global markets.

Representatives of the ministry are in constant contact with investors, while the representatives of the country’s creditors – collectively known as the troika – have already green-lighted these plans. A troika official said that how Athens handles the issue of tapping the markets “is a decision that rests with the government, which only informs us.”

There are five main points to the plan designed by the ministry and the Public Debt Management Agency (PDMA). The first concerns the immediate swap of the treasury bills held by Greek banks with the five-year bonds issued by the state in April. For this to happen PDMA will have to reopen that issue and offer new bonds to the lenders.

Another point provides for a new issue of T-bills, but with a longer maturity period than usual. The objective is for the issue of 18-month T-bills, which would not only constitute a liquidity instrument but would also operate as an indicator of the country’s credit risk. Market professionals argue that investor interest in Greek titles of such a maturity period is keen and say it is almost certain the T-bills will be fully absorbed by the market. The amount to be drawn from such an issue would not exceed 2 billion euros, as the primary aim is not drawing money but creating one more product for the Greek yield curve.

The third point in the PDMA plan provides for the reopening of the three-year bond auctioned last week. Offers were at rather low levels, though the Finance Ministry is aware that this was not because investors were wary of the Greek issue but, rather, because of developments with Portuguese lender Banco Espirito Santo. Ministry officials are confident that once the dust from the Portuguese problem has settled, it will be possible to reopen the book for the same bond and attract those who chose not to get involved the first time.

The plan further includes the issue of new seven-year debt. This will be the next step for Greek securities following the issue of five- and three-year bonds that were missing from the local market.

The last of the five points in the Greek plan concerns the issue of new 10-year bonds, used as the benchmark for the country’s debt. At the moment the 10-year paper is negotiated at the secondary bond market, but this concerns old issues. The last step for the formation of a proper yield curve for Greek bonds is the sale of new 10-year securities, which will represent the best possible reflection of investors’ views on the course and future of the Greek economy.

Of course all of this cannot be done in the next six months, though the Finance Ministry is eager not to delay too long on the first three steps of its plan. Now that Greece has had two positive issues (one very successful and another that did moderately well given the market circumstances due to Portugal) in the last few months, the government wants to ensure that Greece continues to be the focus of positive attention.

In this context, it is estimated that the ministry will proceed with one step of its plan every three or four months, although the issue of seven-year and 10-year bonds are parts of the plan that will need to be implemented in the long-term. After all, if the ministry does not implement all of the steps it will be virtually impossible for Greece to fully return to the international markets. Officials say that only through careful planning and measured initiatives can the target of a full and permanent return to the markets be attained.

For the time being the ministry is consistently implementing the T-bill issue program involving three-month and six-month paper. On Tuesday the PDMA will auction three-month T-bills aimed at drawing 2 billion euros in total.This will be used to refinance the T-bills maturing on Friday.

T-bills have in the last few months attracted an increasing number of foreign investors. Sources say that over the last five T-bill auctions the share of foreign investors figures at around 50 percent for each issue. This lightens the financial reports of Greek banks, which up to four months ago absorbed almost the entirety of those issues.

The question regarding Tuesday’s T-bill auction is the level of the interest rate. In last month’s three-month issue the rate fell below 2 percent for the first time since the start of the financial crisis, to reach 1.80 percent. Ministry officials hope that the tremor in Portugal and the shockwaves it sent through financial markets last week will subside and interest rates on T-bills will return to growth this week.

It appeared by the end of last week that the problem in Portugal was under control, with the yield of the Greek five-year bonds, which reached 4.35 percent on Thursday, dropping to 4.22 percent on Friday, generating optimism in the Greek ministry regarding the next move.